Can you still cash flow at 3% down?

Question

Hi everyone!

I am a first time homebuyer and recently qualified for a 3% down conventional loan to use for a house hack. My plan is to eventually turn into a rental after a couple of years and hold for at least 10 years. However, when running my analysis, I'm not seeing many homes producing positive cash flow.

For context, here are a few details / assumptions I'm using:

- Purchase price ranging from $200 - $275K (pre qualified for up to 275)

- Property taxes at 1.03%

- Insurance $2000 annually (typical for my market at this price from what I've researched)

- PM at 10% of EGI

- Capex reserves ~$250

- Repairs and maintenance 1% of property value

- Rent $600 - $750 per bed (average for my market)

- Most potential deals are returning negative CFs until year 5

Curious if anyone knows believes 97% LTV is too high to cash flow with interest rates being what they are today?

My takeaway from my analysis so far is I need to either 1) save more until I can afford 15-20% down or 2) wait for home prices to continue falling

Any feedback is appreciated!

Bradley Dosch · Answer

Hey Adam, great questions and super cool that you're doing so much research on getting started. The short answer is yes, but let's dive into that more.

First off, the leverage you can get with house hacking is super powerful. The fact that you can control an asset worth hundreds of thousands of dollars with 3% down is pretty neat. Just from a perspective of appreciation, loan pay down, tax benefits, and merely getting started gaining experience is huge in my book.

You've done a great job of analyzing deals in your market and trying to make them work with a rent by the room scenario.

If you are living there, make sure to take into account the rent savings/opportunity cost. For example, if you'd be paying $1k in rent if you didn't buy a house hack, factor that in as it 100% affects your personal cash flow. Even if you're not living for free, it is almost always worth paying a little bit out of pocket for place to live in that you own.

Building off of this, make sure to analyze the deal for when you move out. This should obviously boost your cash flow and then you'll have a full time rental property that you put 3% down for - pretty special.

You can then repeat this process with low down payments. Stay patient and allow rents and your equity to grow each year. Few years down the road you'll be in a great place with a portfolio of houses you put little money down on. Ok - I'm getting carried away from your question :)

It is possible to cash flow with 3% down, although typically creative rental strategies like rent by the room, medium and short term rentals are needed. This is of course more work but in a neat location like Athens, you should have plenty of demand.

The reason for all my other paragraphs is to encourage you to look big picture with this house hacking journey. Cash flow is important, but in my experience it hasn't been the most powerful metric.

Hope this helps, good luck Adam!

Lindsay Davis · Answer

Hey @Adam Kayne, congrats on taking the plunge into real estate—it’s great to see some new faces on this platform!

You pose an interesting question, and your preliminary research seems to be leading you to the right conclusion. At 3% down—given the current interest rate environment—it’s very difficult even for a fully-leased property to generate positive cash flow, let alone a house-hacked multiplex.

For example, let’s assume that you’re buying a quadruplex at a purchase price in the middle of your range—say, $240,000. You have three units to rent out since you’re occupying the fourth one.

If each of your three rentable units fetch $750 per month, you’ll pull in monthly gross rents totalling $2,250. Plug in your Opex assumptions (property taxes, insurance, repairs and maintenance, etc.), and we arrive at about $1,050 in operating expenses per month.

This means that you’re left with $1,202 in monthly net operating income (NOI), at around a 53% NOI margin and a 6.01% cap rate. Now it’s time to use that money to pay off your mortgage!

At 3% down on a $240,000 property, you’ll be putting down $7,200 and borrowing $232,800. If you take out a mortgage with a 30-year term at a 6.5% interest rate, you’ll pay $1,471 a month.

Subtracting your NOI from your mortgage payment leaves you with -$269 in cash flow a month, or -$3,229 in cash flow for the first year.

There are a few things that seem to move the needle when it comes to improving our cash flow situation:

1. Lowering the purchase price. Say you’re able to buy a quadruplex at $220,000 instead of $240,000. If we hold all else equal (rents, opex, interest rates, mortgage insurance, etc.), we find that your cash flow situation improves to -$246 a month, or -$2,953 for the first year. At an even lower purchase price of $200,000, you’ll generate -$77 a month in cash flow, or -$930 for the first year. While still negative, you’ll be very close to breaking even—posting just a -3.4% cash flow margin (i.e. cash flow after debt service divided by gross rent) for the first year.

2. Raising your down payment. This time, let’s see what happens when we increase the down payment. At 10% down instead of 3%, you’ll take out a $216,000 mortgage and pay $1,500 a month in principal, interest, and mortgage insurance. That leaves you with cash flow of -$298 a month or $3,575 for the first year. Even at 15% down, things aren’t much better from a cash flow standpoint, and it’s largely because of the burden of mortgage insurance. You’ll be putting $36,000 down and borrowing $204,000, leaving you with $1,417 in debt to service per month, $128 of which is mortgage insurance. As a result, you’ll post cash flow of -$215 a month or $2,575 for the year. To generate positive cash flow in the first year, you’ll need to put 21% down, or $50,400 for a $240,000 property. This eliminates mortgage insurance and shrinks your monthly debt service obligation to just $1,198 a month, leaving you with positive cash flow of $4 a month or $48 for the first year.

As you can see, there are a bunch of assumptions to test, and it’s better to model your assumptions out so that you can get a feel for how changes to various inputs affect your cash flow situation. To that end, I made you a custom model so that you can get started more easily.

It’s a Google Sheet, so just click File → Make a copy to get full access to the document. Hope this helped, and best of luck!

Ty Ash · Answer

Hi @Adam Kayne!

Go through these questions to help you on deciding if a deal makes sense for your situation:

If you're house hacking this property by renting out the rooms, will you be paying less than typical rent for your area while you live there?

Do you have the potential to force some appreciation with some projects (my favorites are carpet, paint, and flooring)?

When you move out, will you be at least breakeven when accounting for PITI and Expenses (even if you are close, this may make sense if the next question is yes)?

When you look at your BP Calculator for the deal, will you have built equity over 5 years with conservative appreciation assumptions for your market and tenants paying down your principal?

My guess is by putting about $9,000 down and $6,000 in closing costs and some money into updates and repairs that you will have a positive impact on your net worth by buying your deal even if the cash flow is close to breakeven. Plus you'll hopefully have lower expenses while you live there that can increase your savings rate for the next deal. You just need to get started and make sure you're operating with reserves so that you can keep the deal for the long term.

Best of luck getting started! Here for you with any questions you have along the way!

Account Closed · Answer

What area are you in? I would love to be able to help

Joe Villeneuve · Answer

Yes.  You just need to find the right market, and use the correct strategy for that property in that market at that time.

Adam Kayne · Answer

I'm located close to downtown here in Athens

Can you still cash flow at 3% down?

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